If you haven't been following the McDonald's (NYSE:MCD) domestic sales story closely, it probably sounds kind of funny to use the word "comeback" when referring to the world's biggest hamburger chain. But since McDonald's is a public company, shareholders demand growth no matter what. Lately, they have been disappointed, but the latest trend suggests this may be about to change.
McDonald's dropped the ball last year
McDonald's has been so busy trying to change itself that this seems to have backfired. Burger King Worldwide (UNKNOWN:BKW.DL) launched an all-out war on McDonald's core menu while McDonald's had its back turned and was busy trying new things like Fish McBites and Mighty Wings.
Critics complained these new menu items were no good. Franchisees complained that they were too expensive and made the menu overly complicated. Customers complained the wait was getting too long. It seems like the only one that's been happy is Burger King.
While Burger King still has a lot of catching up to do sales-wise, the Home of the Whopper has no problem using guest frustration at McDonald's to its advantage. Burger King launched its own version of the Big Mac, called the Big King, its own McRib-style sandwich, its own McChicken-style sandwich, and its own solution to unhealthy french fries, called Satisfries.
Back to the basics
Sometimes the best course of action is to do nothing. Or at least nothing new. Don Thompson, McDonald's CEO, stated during the latest conference call: "Our major focus in the U.S. is right now [is] kind of a back to the basics with some enhancements in terms of our productivity and capability in the restaurants."
Thompson further recognized that the company requires "a constant drumbeat of communication" regarding its core products. All that advertising and marketing spent on Mighty Wings and Fish McBites was time and money diverted away from its core products, allowing Burger King to move right in.
But actions and results speak louder than words, and domestic sales continue to be weak. However, the trend is quite encouraging. Consider this...
An upward trend beginning?
In the third quarter of last year, domestic same-store sales inched up 0.7%. For the fourth quarter, they tumbled by 1.4%. For January things got even worse: Same-store sales plunged 3.3%. Part of the reason for the weakness was the bad weather, but Burger King and others were also affected and showed modest but positive gains.
January appears to have been the bottom and possibly the wake-up call for McDonald's. For February the drop was 1.4%, and for March it was down only by 0.4%.
Then on May 8, McDonald's announced flat same-store domestic sales for the month of April. You wouldn't normally think it would be nice to see zero growth, but in this case it marks hopefully the end of the red and back to the growth phase. Apparently Taco Bell's breakfast launch didn't do much damage -- or it may have even brought McDonald's more attention.
In its recent press release, McDonald's pointed out that the "industry dynamics remained challenging." It's interesting that the company used this phrase in the past tense. Usually in its releases McDonald's will use present-tense words, such as "ongoing." Might this suggest things are looking up?
Thompson also stated, "We are strengthening our business plans by emphasizing customer-driven strategies." Normally his statements include more cautionary language and are prefaced with qualifiers such as "we intend on" or "our highest priority is." Perhaps this reflects an increased confidence or even a momentum swing already happening in May? Of course, investors must be cautious of reading too much into such details, but it's an interesting change.
In April, McDonald's introduced a free coffee promotion to drive sales of its core breakfast items and a Bacon Clubhouse Burger for lunch and dinner. Both ideas sound in line with its new strategy to keep it simple, focus on what it is good at, and stop adding complicated new items.
The new trend of a decreased drop in same-store sales is only three months old. It will be interesting to see how the domestic trend stacks up over the coming months. If it continues to improve, McDonald's may very well be on the comeback trail.